Thu | Dec 3, 2020

Editorial | Zacca report: indictment of Petrojam

Published:Tuesday | July 2, 2019 | 12:00 AM

The release of the Zacca Petrojam Review Committee report is a welcome development. It covers most of the areas germane to the refinery and port terminal operations. The huge J$7-billion operational losses revealed for the refinery is a good metric for how poorly it has been run over the last four years.

The broad recommendations are in line with general expectations. The rejection of the proposed investments in the refinery upgrade and the VDU plant makes sense. There is simply no convincing business case for the State spending more than US$1.2 billion to upgrade the refinery.

Once the Jamaican Government becomes the sole owner, assuming that the legal issues with Venezuela are settled, the financing would almost certainly be part of public debt or a contingent liability. This would conflict with the commitment to reducing the debt-to-GDP ratio to 60 per cent and would compromise spending in the vital areas of health, education, and security.

Given the general level of deficiency outlined in the report, confirming the auditor general and Public Administration and Appropriations Committee findings, it is understandable that Christopher Zacca, a businessman, would suggest that the private sector “provides the only credible opportunity to improve operating performance” at both the refinery and the terminal.

A significant number of the recommendations were operational in nature, which the public would have all right to assume were already being undertaken by leadership of Petrojam.

For example, the management knew more than three years ago about the fundamental market change under way, with the Jamaica Public Service Company shifting from heavy fuel oil to LNG, and that the new international maritime protocol for low-sulphur fuel would come into force in 2020. It is surprising, therefore, that action was not taken, and at this late stage, the review is instructing Petrojam to:

1. Make every effort in the short run to maximise processing of sweet crude to reduce production of HFO and increase production of more marketable LSFO.

2. Immediately commence commercial investigation of the best arrangements for long-term supply of sweet crude.

3. Commence market investigations for the potential sale of low-sulphur fuel oil.

IRONIC REQUEST

The failure to have done these things earlier is a serious indictment. It is ironic, therefore, that the review is, in a sense, asking the same people who failed to act earlier to undertake these tasks with great urgency now.

The report stated: “Petrojam management, separate from the board, need to clearly own, champion, and be measured as to their ability to execute the various improvement (financial reporting, costs, refinery utilisation, among others) programmes as a critical priority. There is no economic future for the refinery if these programmes are not successful, and in the short-term, management needs to be held accountable for such.”

The privatisation of the refinery and the terminal, a key recommendation of the report, cannot be undertaken in isolation from the general policy context for the energy sector. In fact, the review recognises that the privatisation of the refinery and terminal should be done within the context of an enhanced regulatory framework.

New private owners will want concrete assurances about the kind of regulation they will face before investing. However, a new regulatory framework will require a look at the existing energy policy. Some important policy questions would include: What degree of competition will be allowed in the refining business? Will new regulations preserve the Petrojam monopoly on the refining of crude oil? The entire Petroleum Act may require revamping.

There are significant challenges ahead for Energy Minister Fayval Williams and her team if the urgency revealed by the Zacca report is taken seriously. It is good that the prime minister has given the assurance that there will be public consultations around these important changes. The energy sector and how it is managed impacts the life of every single Jamaican. We all have a stake in the proposed changes.